Sunday, August 31, 2014

My View

We are being constantly told by the talking heads of the media that the economy is recovering. And as a consequence, we should all feel good about the state of affairs of our domestic economy.

Not so fast.

After a dismal first quarter of negative economic growth- blamed on cold weather- the economy is still struggling to get traction. So far, consumer spending has grown this year by 1.8%, and when you factor in the effect of inflation, which is estimated to be 5% without the adjustments made in the calculations by the government, real growth is negative.

Here are some facts from the latest Commerce Department report that should shed some light on our current situation:

25% of all personal income in this country is either a transfer from the government to individuals or income from a government job. That is $3.7 trillion taken from producers and given to those that do not produce a product or service in the private sector. The relentless growth of spending on social programs is projected to increase that percentage to 30% by the year 2020.

Real personal income increased by 2.6% last year, but when factoring in the real inflation cost of 5%, real income has declined 2.4%.

Government policy that has produced a 0% interest rate environment is estimated by the Commerce department to cost savers $500-700 billion per year. This has an obvious negative impact on spending and consumer confidence.

Consider the following information from the Commerce Department:

Notice that those that should be entering their prime earning years have actually seen their incomes decline. Is it any wonder that the economy is struggling?

Those that would typically spend as they start their families and as they grow have seen their incomes fall since the end of the recession. We shouldn't be surprised that consumer confidence is weak since the facts do not support an environment that would lead to growing confidence.

But wait, the markets are at record highs, so everything has to be good, right?

Well...

There is a huge divergence between the performance of the world's stock markets and the projected growth of the world's economies.

The performance of the S&P 500 in this country has not been related to the number of people that are employed.

So what is driving the market?

The market has risen almost in lockstep with the expansion of the Federal Reserve's balance sheet.

The Fed's attempt to drive the economy has failed miserably, even with an additional $4 trillion new dollars printed over the past five years. The policies of the Fed have not benefitted Main Street or middle class Americans.

The reality is that the market does not reflect the underlying weakness of the economy or the struggle that most Americans face.

But it eventually will.

How it plays out will be... interesting. Either the Fed will continue its obviously flawed policies, which will sooner or later debase our currency and fuel significant inflation. Or the Fed will allow normal market forces to begin to correct the excesses in our system, which will cause a correction in the markets.

Either way, it will painful.

Main Street, and middle class Americans, are telling policy makers that things aren't right and that the policies coming out of Washington aren't working.